Question

Sell Block prepares three types of simple tax returns: individual, partnerships, and (small) corporations. The tax returns have the following characteristics:

	Individuals			Partnerships			Corporations
Price charged per tax return	$	240		$	1,250		$	2,150
Variable cost per tax return (including wage paid to tax preparer)	$	195		$	1,150		$	1,970
Expected tax returns prepared per year		64,000			8,000			8,000

The total fixed costs per year for the company are $582,400.

Required:

a. What is the anticipated level of profits for the expected sales volumes?

Anticipated profit: __________

b. Assuming that the product mix is the same at the break-even point, compute the break-even point.

Break-even point: __________

c. Suppose the product sales mix changes so that, for every ten tax returns prepared, six are for individuals, one is for a partnership, and three are for corporations. Now what is the break-even volume for Sell Block?

Break-even point: __________

Answer 1

Solution a:

Computation of anticipated level of profits
Particulars	Individuals	Partnerships	Corporations	Total
Price charged per tax return	$240.00	$1,250.00	$2,150.00
Variable cost per tax return	$195.00	$1,150.00	$1,970.00
Contribution margin per tax return	$45.00	$100.00	$180.00
Expected sales volume	64000	8000	8000
Expected contribution margin	$2,880,000.00	$800,000.00	$1,440,000.00	$5,120,000.00
Fixed costs				$582,400.00
Expected profits				$4,537,600.00

Solution b:

Computation of weighted average contribution margin per return
Particulars	Individuals	Partnerships	Corporations	Total
Price charged per tax return	$240.00	$1,250.00	$2,150.00
Variable cost per tax return	$195.00	$1,150.00	$1,970.00
Contribution margin per tax return	$45.00	$100.00	$180.00
Sales mix	80%	10%	10%
Weighted average contribution margin per return	$36.00	$10.00	$18.00	$64.00

Breakeven point = Fixed cost / weighted average contribution margin per return

= $582,400 / $64 = 9100 returns

Solution c:

Computation of weighted average contribution margin per return
Particulars	Individuals	Partnerships	Corporations	Total
Price charged per tax return	$240.00	$1,250.00	$2,150.00
Variable cost per tax return	$195.00	$1,150.00	$1,970.00
Contribution margin per tax return	$45.00	$100.00	$180.00
Sales mix	60%	10%	30%
Weighted average contribution margin per return	$27.00	$10.00	$54.00	$91.00

Breakeven point = Fixed cost / weighted average contribution margin per return

= $582,400 / $91 = 6400 returns